"Effects of Abandoning Fixed Exchange Rates for Greater Flexibility"

At the recent NBER ISOM conference, Andy Rose presented a paper entitled Flexing Your Muscles: Effects of Abandoning Fixed Exchange Rates for Greater Flexibility, coauthored with Barry Eichengreen, following up on this 2010 paper, evaluating the effects of flexing (VoxEU post here).
For purposes of this short paper we examine a
comprehensive data set covering over 200 countries and territories since 1957. ...
...We then
narrow our focus to 51 instances where countries abandoned currency pegs for regimes of
greater flexibility and allowed their exchange rates to appreciate. This permits us to examine
systematically the impact of these events, which we call "flexes," on a range of macroeconomic
and financial variables, including GDP growth, export growth, consumption, investment and
inflation. We look for and, if necessary, correct for selectivity bias by searching for differences
in country circumstances in the period before the decision to flex was taken....In a subset of cases, however,
the decision to flex is followed by a discernible slowdown in the rate of growth of the economy.
Slowdowns are most likely, we show, when the investment ratio is high, consumption,
investment, exports and imports are growing rapidly, and credit growth is rising. Since we only
have 51 observations, we cannot hope to be precise, but our results are robust in the case of
high investment rates and rapid import growth in particular; both of these presage a decline in
growth following flexing. The implication is that China may have some basis for worrying about
the growth effects of appreciating out of its fixed exchange rate regime.
In a subset of cases, the decision to flex was also followed by a significant decline in the
rate of inflation. Slower inflation is most likely, we show, in countries that are relatively open
to trade (where the reduction in the rate of import price inflation presumably has the greatest
impact) and with high foreign reserves (which had presumably been sterilizing capital inflows with less than complete success prior to the change in exchange rate regime). These results
also have obvious implications for China, which is currently characterized by inflation and the
other macroeconomic characteristics in question.

The discussion focused on some of the methodological issues; some of the identified "flexes" were associated with the end of the Bretton Woods system. The question then would be whether the lessons transferred from those episodes to more recent episodes.

In the conclusion, the authors highlight the implications for the debate of more rapid RMB revaluation.

At the same time, it is possible to pinpoint the kind of circumstances where the decision
to move to greater flexibility is likely to be followed by a significant economic slowdown. The
slowdown‐prone economies are those with exceptionally low consumption rates and high
investment rates. They are economies where exports and domestic credit have been growing
most rapidly. To put it simply, they are economies with Chinese characteristics.
These findings suggest that China may have had good reason to be cautious about not
moving away from its peg to the dollar too abruptly. But they also point to the kind of policy
reforms and macroeconomic rebalancing that the country should pursue in order to prepare
the way for its eventual adoption of a more flexible exchange rate.

I noted that in fact Chinese policymakers themselves had pointed out the need for slower, but higher quality, growth (see [1] [2]). In that sense, the paper's finding could not be taken as an unambiguous finding that revaluation/flexing would be a net negative for China.

Note that this event approach differs that of Kappler, Reisen, Schularik and Turkisch (2011) (discussed here, who included in their sample "step revaluations", i.e, revaluations from one pegged rate to another.

Related

REUTERS/Nguyen Huy KhamQuick: Name the Asian country whose cheap labor costs have attracted droves of foreign manufacturers, driving an explosion in export-driven economic activity that is now transitioning to more moderate, consumer-based growth. Did you say China? Vietnam would have been correct, too.

In the same quarter in which the US teetered on the verge of contraction (supposedly due to inclement weather despite not one but two seasonal adjustments meant to eliminate "residual seasonality"), Japan grew at the fastest pace in a year and nearly triple that of the US.

For the better part of 2013, China’s economy has been doing something it hasn’t done for years: cooling off. The country’s 7.5 percent year-over-year GDP increase in the second quarter still puts that of the world’s other major economies to shame but it’s also a far cry from the 14 percent rate of 2007. China’s breakneck expansion and corresponding appetite for raw materials has been a major boon to commodity-producing countries over the past decade, while its shipments overseas of everything from clothing to electronics have made it the world’s largest exporter.

Exports in Context
Anybody who follows forecasts of GDP growth for 2011Q1 will notice that over time, estimates have been revised down (this is true for Macroeconomic Advisers, for instance). The dimmed prospects for GDP growth throws in high relief the importance of net exports. From the WSJ, "Foreign Shocks Temper America's Export-Led Rebound":
To an extent unique in post-World War II history, the U.S.

Economists expected a 6% rise in Chinese exports. Instead, exports fell 0.3%. Please consider China's September export growth in surprise slide.
China's export growth fizzled in September to post a surprise fall as sales to Southeast Asia tumbled, data showed, a disappointing break to a recent run of indicators that had signaled its economy gaining strength.

WASHINGTON — The U.S. trade deficit narrowed sharply in June to its lowest level in more than 3-1/2 years as imports fell and exports touched a record high, suggesting an upward revision to second-quarter growth.
The Commerce Department said on Tuesday the trade gap fell 22.4% to US$34.2 billion, the smallest since October 2009. The percentage decline was the largest since February 2009.
May’s shortfall on the trade balance was revised to US$44.1 billion from the previously reported US$45.0 billion.

NEW HAVEN – At 7.7%, China’s annual GDP growth in the first quarter of this year was slower than many expected. While the data were hardly devastating relative to a consensus forecast of 8.2%, many (including me) expected a second consecutive quarterly rebound from the slowdown that appeared to have ended in the third quarter of 2012.

ByInvestment Biker:Most countries abandoned the gold standard during the Great Depression of the 1930s. As a result, currencies of major economies lost their intrinsic value in quick succession. Under the gold standard, the currency value was fixed to the price of gold (GLD). This was a major disadvantage as it barred them from printing excess money.